What Are Non-Current Liabilities? With Examples

Businesses and individuals often incur financial obligations that must be settled over time. These obligations, known as liabilities, represent amounts owed to other parties. Liabilities are a fundamental component of financial reporting, providing insight into an entity’s financial position. Within the broader category of liabilities, a significant distinction exists between those due in the short term and those that extend further into the future. This article focuses on non-current liabilities, which are long-term financial commitments.

Defining Non-Current Liabilities

Non-current liabilities, also known as long-term liabilities, are financial obligations a company does not expect to settle within one year from the balance sheet date. This distinguishes them from current liabilities, which are due within the next twelve months or the operating cycle, whichever is longer. Their defining characteristic is an extended repayment period.

This distinction is important for understanding a company’s financial structure and its ability to meet future payments. For instance, a long-term loan for equipment would be classified as a non-current liability, as its repayment schedule extends beyond the immediate year. This classification reflects the longer-term nature of the commitment and its impact on financial planning.

Common Examples of Non-Current Liabilities

Several common types of financial obligations are classified as non-current liabilities due to their extended repayment terms.

Long-term loans and notes payable are obligations with repayment periods stretching beyond one year, often used to finance major assets like buildings or equipment. Mortgages are a prime example, where a business borrows a substantial sum to acquire real estate, repayable over many years, such as 15 or 30 years. Bank loans for capital expenditures with schedules exceeding twelve months also fall into this category.

Bonds payable represent a company’s promise to repay borrowed funds, with interest, over a predetermined, long-term period. Corporations issue bonds to raise large capital for long-term projects. These instruments are recorded as liabilities until maturity, often many years in the future.

Deferred revenue, also called unearned revenue, arises when a company receives advance payment for goods or services to be delivered in the future. For example, a software company selling a two-year subscription receives cash upfront but recognizes revenue gradually as the service is provided. Until fully delivered, the unearned portion remains a long-term liability.

Deferred tax liabilities occur due to temporary differences between a company’s financial accounting income and its taxable income. This often happens when companies defer tax payments to a future date, such as by using accelerated depreciation for tax purposes while using straight-line depreciation for financial reporting. This creates an obligation to pay higher taxes in future periods, making it a long-term liability.

Pension obligations represent a company’s commitment to provide retirement benefits to employees based on factors like years of service and salary levels. Defined benefit pension plans create a long-term liability because the employer guarantees a specific future benefit amount, requiring estimates of future payouts extending decades into the future. These obligations are calculated using actuarial assumptions.

Long-term lease liabilities arise from lease agreements extending beyond one year, where the lessee has the right to use an asset in exchange for payments. Under accounting standards like ASC 842, most long-term leases are recognized on the balance sheet as both a “right-of-use” asset and a corresponding lease liability. This liability represents the present value of future lease payments over the lease term.

Importance on Financial Statements

Non-current liabilities are reported on a company’s balance sheet, providing a snapshot of its financial position. Their presence and magnitude indicate a company’s long-term financial health and solvency, meaning its ability to meet its long-term financial commitments. These obligations often fund significant long-term investments, such as property, plant, and equipment, essential for operations and growth.

A high level of non-current liabilities relative to assets or equity might suggest reliance on debt financing, increasing financial risk. Conversely, a manageable level indicates a company’s capacity to strategically leverage external funding for expansion without undue strain. Investors and creditors closely examine these liabilities to evaluate a company’s risk profile and its ability to generate sufficient cash flows for future debt service. Understanding these long-term obligations is essential for making informed decisions about a company’s stability and future prospects.